IR35 case loss turns the tables on HMRC

An independent construction contractor has won his appeal against HMRC in the second IR35 ruling to emerge in two months, adding further complexity to IR35 determinations and undermining HMRC’s employment status tool.

Hot on the heels of last month’s victory for HMRC over BBC presenter Christa Ackroyd, this latest first tier tribunal (FTT) decision is an unusual one, most notably because the majority of recent IR35 cases have gone the way of HMRC.

However, the case has divided opinion in the tax world, with some sector experts casting the verdict as a significant blow against HMRC, while others sounded a note of caution about its relevance to the slew of similar cases coming down the road.

HMRC determined in 2016 that the contract to provide services on large construction projects should have been caught by IR35, and the service company should have paid PAYE and NIC.

However, Daniels successfully appealed this determination, with the FTT finding the engagement was correctly categorised as self-employment, and Daniels should not be treated as an employee.

The judge summarised the factors which pointed to employment or self-employment as follows:

For employment:

No substitution permitted

Daniels took no financial risk

Safety equipment was provided by STL

Against employment:

Daniels was not controlled by STL any more than any other contractor

Daniels could refuse to work on another site

He was paid a fixed rate per day

No notice period

No sick pay or holiday pay

No employment benefits

No expenses paid for travel or accommodation

He was not integrated into STL

One of the key factors in the decision centred on the fact that Daniels was not entitled to a notice period, holiday pay or any employment benefits under his hypothetical contract, and therefore would not have been an employee if he had been engaged directly.

According to RSM tax consultant Andrew Hubbard, another of the main bones of contention around the case was control. HMRC argued that the end user (STL) controlled Daniels by specifying the shift patterns he had to work and giving him instructions for the work which needed to be done.

However, the FTT concluded that in a large project there was a clear structure to the work which had to be done and that an individual working within that structure was not being controlled by the end user.

In evaluating the overall situation, the FTT decided that Daniels was not treated as an employee and IR35 did not apply. The case shows that one factor should not override all other factors, and the relationship as a whole should be considered.

‘Hammer blow’

“This judgment suggests that a contractor who is not controlled, is paid a daily rate, has no notice period or benefits, and is not part and parcel, should not be caught by IR35,” said Chaplin.

While Chaplin believes this is good news for the contractor, he also suggested that some case law was given limited consideration in the judgment, which could leave the door open for an appeal to the Upper Tribunal by HMRC.

HMRC ‘need to be winning cases’

For IR35 expert David Kirk, the verdict does not carry a huge amount of weight in terms of the cases stacked up behind it.

“It covers little new ground,” Kirk told AccountingWEB. “The tribunal found that there was mutuality of obligation, which has raised eyebrows but is unsurprising – there generally is – and the finding that Mr Daniels was outside IR35 rested on other factors.

“The most novel one was the way that the judge looked at the kind of rights that come from employment (pension contributions, sick pay, holiday pay etc.), saying that one needs to look at what Mr Daniels would have got, were he an employee of STL. HMRC’s rather lazy argument was that he got these rights by virtue of being an employee of his own company.

“Interestingly, neither party was represented by barristers at this hearing, which indicates to me that HMRC did not consider this case to be of enormous importance either. This is a big mistake on their part: at a time when they are trying to extend the public sector IR35 rules into the private sector they need to be seen to be winning cases.”

‘Difficult legislation to navigate’

Commenting on the decision David Redfern, founder of DSR tax claims, told AccountingWEB the ruling highlights his assertion that IR35 is “unworkable” for contractors in the complex gig and contracting economy.

“This current ruling highlights just how difficult this taxation legislation is to navigate – for companies and contractors alike, the majority of whom do not have access to expert advice and have to muddle along the best they can,” said Redfern.

“For contractors in the construction and IT industries, for example, trying to avoid falling foul of HMRC is akin to tightrope walking and for this reason alone, I believe that this legislation should be revisited and reworked”

Employment status tool takedown

For Andrew Chamberlain, deputy director of policy and public affairs at self-employed association IPSE, the result also has implications for the Check Employment Status for Tax tool (CEST), which was criticised in oral evidence before MPs at the Culture select committee inquiry into BBC pay last week.

Chamberlain commented that the tool “cannot be relied upon to make correct determinations, which is why many organisations feel forced to take a blanket approach – pushing all off-payroll engagements into IR35 unfairly.”

Dave Chaplin also criticised the CEST and called for the immediate withdrawal of the tool.

“ContractorCalculator has run the case through HMRC’s CEST tool and it was “unable to determine” the status of the worker.

“This is now the case for nine out of the 23 IR35 court cases we have tested, where CEST cannot give an answer,” said Chaplin. “It is not fit for purpose and as we have seen with the BBC fiasco it facilitates widespread misclassification of workers.”

Replies

Why does it matter that HMRC did not instruct counsel? That is neither here nor there in my view, especially when the taxpayer did not do so either. HMRC only engage counsel as an exception when the matter is complex or very high value perhaps. Also, these FTT judges are tax specialists and it is possibly insulting to them (and the no doubt experienced HMRC officer advocate) to suggest that they got the decision wrong just coz an HMRC barrister was not there to spoon feed them!

Incidentally (and perhaps ironically) all else being equal, taxpayers tend to do better at the FTT when they are unrepresented in my experience (as the judges tend to want to try help them due to a perceived unfairness if they do not help them out a bit), so that could have helped (but to be clear, that only helps it being otherwise unfair, since although the judiciary is independent, you are still fighting the state in its own courts, which is always an inherently unfair disadvantage).

Finally, I find it surprising that this useful taxpayer decision has not been publicised elsewhere (since it was published over a week ago).

On a slightly related note does anybody know the statutory basis for this little gem that has popped up in the PAYE tools from HMRC.

"Addition to type of payment made to employee

Value of payments not subject to tax or NICs in pay period

Enter value of other payments made to your employee that are not salary or wages and subject to neither tax nor National Insurance contributions. Do not enter taxable or NICable amounts here. For details of whether a payment is taxable and/or NICable, please refer to the CWG2.

Also insert salary or wages not subject to tax or national insurance contributions because these amounts have already been taken into account under the off-payroll working rules."

I can't find much discussion about it.

This sounds like the long awaited Field 58A which HMRC told us to use in their guidance note to report earnings which have already had tax and NI deducted by the fee payer.

I was told by the HMRC technical buffs that Field 58A would not be in BPT 2017/18 but would be in the 2018/19 software.

It should just be a flag field with no effect on the payroll itself, as any salary that matches fees already subject to IR35 deductions (to avoid suffering corporation tax too) should not be on the P60. Otherwise, you would get 2 P60s for what is effectively the same salary, one from the fee payer and one from the PSC. This would affect your personal tax even if it was non-taxable as it would sit within the tax bands and shunt other income over the higher rate threshold.

It's surprising that they expect dividends to go in this field too. Sounds like they're taking the opportunity to fish for more information. Unless there is something in the RTI legislation to say dividends must be reported on the payroll, I would be inclined to ignore this.

This just highlights that every case IS different which HMRC should take note of instead of trying to fit square things in round boxes. It also verifies my feelings that HMRC should keep their noses out of employment status and leave it to the market place.

First, it's interesting that the case was published at all. It took a long time to come out, which given the lack of professional representation is also a surprise, but now it's "out there" but far from clarify, it adds another layer of confusion. I do wonder if HMRC tried to supress publication?
Second, I'd agree that an unrepresented taxpayer tends to get a sympathetic hearing but in this instance I suggest being represented would not have reversed the decision.
Third, I'd agree that it's another pointer to just how unworkable the present rules in IR35/CEST/etc have become. That is a situation that will not improve as employment law cases (Pimlico, Uber, etc) go through their channels.
Fourth, will it make any difference to HMRC policy?

No it will not.

HMRC are committed to IR35 for reasons they cannot or will not explain (interesting that they have recently claimed that "increased compliance" is NOT a measure they use for gauging success) and I suspect that they are now in full denial that a policy invented in 1999 should not apply to 2018.

These sort of things have always been ignored by HMRC. Their thinking is that the employer is calling it self-employed to by-pass having to pay all this stuff. It didn't actually help anyone when the good old EU decided that all "workers" were entitled to holiday pay etc. etc.

Ironic that HMRC 'lazily' concludes that the benefits package is already being supplied by the PSC out of the gross fee. Normally, I would wholeheartedly agree. Only it makes no sense for HMRC to say that, in this instance, when they believe that the PSC was not operating as a 'real business' in the first place. Therefore, how can they expect the contractor to pay themselves benefits out of what HMRC assume to be entirely taxable net income for that assignment?

There is a big difference between an end client engager providing a 'brief' to communicate what work needs to be done (and when by) and telling them how exactly to go about doing it to the point of suggesting the contractor is just a pair of 'hired hands' and not an expert to execute his skill and know how to complete the work. It seems that HMRC do not know the difference.

I think this is a prime example of how HMRC failed to present a winnable case, and should not have tried, rather than it being a clear cut case of the contractor holding all of the Ace cards. Clearly there were grey area to determine status in this case and in a different courtroom another time a better presented case, on similar facts, might well result in a different finding.

It is always the "client" meaning the actual entity that requires work done, be it a bank, large group of companies or Mrs Jones (she makes lovely tea and cake) down the road who have the "control" over what has to be done. This information will be passed down the line to whoever carries out the work. HMRC don't look at the whole picture when it doesn't suit.
If presented properly I believe HMRC would lose every IR35 case. Why? Simply because IR35 is totally wrong and to take away Limited Company status for the sake of getting more Revenue is totally wrong.

What would really be useful to contractors and their advisors is information on how this case and others were picked up by HMRC in the first place. Was it a random enquiry, or a tip-off, or was there a red flag of some kind like late returns that prompted them to launch an IR35 investigation?

Of course, HMRC never say, but the client probably has a fair idea. Being a media organisation, perhaps AWeb could do some journalistic research and find out.

HMRC are upping their game but these IR35 cases are still as rare as hens teeth, and the average contractor can expect not be picked up so long as he stays under the radar.

It is just as important to avoid an enquiry in the first place as it is to cover the IR35 angles, and it would be really interesting to know how the cases that do come to their attention are chosen.

I always have problems integrating employment rights when running the test.
If all the other factors determine the result,then employment rights then flow from this ?
That said of course if employment rights,are already in the “contract”;then stop there,clearly an employee ?